Tuesday, March 17, 2015

China's Asian Investment Bank a tool to spread soft power

The International Monetary Fund, the Asian Development Bank, and World Bank may lose their influence and place in the Far East as China's Asian Infrastructure Investment Bank [AIIB] gains backers and draws in support from European countries.


The establishment of the AIIB was first discussed in 2013 with the Chinese government expressing its frustration with what it regarded as the slow pace of reforms and governance, and wanted greater input in global established institutions like the IMF, World Bank and Asian Development Bank which it claimed were dominated by American, European and Japanese interests [Economist].

The United Kingdom signed up to be a founding member of the bank ahead of a deadline at the end of March 2015 [WSJ]. France, Germany and Italy have followed Britain's lead but the US has a move that has rattled the US [Guardian / FT].

Originally unveiled in October 2013 by China's President Xi, the proposal was to harness some of China's vast financial resources and the expertise acquired in its modernisation in order to improve situations elsewhere in the region. However, as well as becoming a potential rival to the Washington-based World Bank, there are fears that Beijing will use the bank to extend its soft power in the region.

Geopolitics & economics

Martin Wolf, widely considered to be one of the world's most influential writers on economics, and an associate editor and chief economics commentator at the Financial Times, has dismissed such concerns. Whilst he acknowledges the AIIB may well precipitate geopolitical and economic rivalry, he says the general idea "makes sense" [FT].

It might make sense on one level, after all China arguably has a better understanding of its neighbours' needs and wants. Some of its neighbours such as Laos and Myanmar, for example, lack the resources themselves to invest heavily in infrastructure. Indeed estimates of the cost of a railway from Kunming in south-western China to Vientiane, the Lao capital, for example, start at $6 billion, almost as much as Laos's entire GDP.

"Soft power"

For China to step in and build and finance it on its own might look like colonialism. But since the bank would enhance both China's direct influence over what gets built and its indirect "soft power" the effect would essentially be the same.

In fact it may prove more beneficial to China since local sentiments would be less strained as direct Chinese investment in neighbouring countries has often been seen as interfering.

The US has been particularly outspoken about the potential influence the AIIB may have in the region. With talk of western European countries joining one unnamed official expressed concerns saying, "We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power." [FT / Washington Post]

Changing the rules

The Obama administration has expressed the opinion that should the G7 group of leading economies and others rush to join institutions such as the AIIB, it could end up becoming an instrument of Chinese foreign policy.

But Britain's chancellor of the exchequer, George Osborne, has been unrepentant, arguing that Britain should be in at the start of the new bank, ensuring that it operates in a transparent way. Furthermore Osborne believes it fills an important gap in providing finance for infrastructure for Asia.

It remains unclear whether the Chinese-led AIIB initiative will complement or compete with the World Bank and Asian Development Bank to meet Asia's capital investment needs. What is clear, however, is China's willingness to challenge America's long-established strategy of institutionalising power in a rules-based order [lowyinterpreter].

When China negotiated its becoming a member of the World Trade Organisation in 2001, it hinted that its long term intention was one of reshaping the organization it wanted to join. Indeed at one particularly contentious point in its negotiations to enter the WTO, the Chinese ambassador reportedly thundered, "We know we have to play the game your way now, but in ten years we will set the rules!" [IIE].

In the 15 years since, not only has China's economy grown significantly, but so too has its confidence. This confidence is repeatedly manifesting itself in greater assertiveness with China pushing the bar higher and higher as it demands things be conducted according to its vision of the future.

There are some that argue the US join the party and attempt to effect change from the inside [Forbes]. However by doing so the US would lose face.

Of course it could simply drop the issue and let the AIIB rise or fall on its own merits. But this option simply leaves the US sitting on the fence, watching as China increases its influence in Asia.

tvnewswatch, London, UK

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